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EU Economic GovernanceIntroduction‘In every crisis there is opportunity’. This saying can beapplied to the economic and financial crisis that Europe hasbeen facing over the past three years. One could view thecrisis as an opportunity to make up for past mistakes or pastreluctance to do what was necessary. This was theapproach adopted by the European institutions when theycame up with their proposals on economic governance.Although these proposals are innovative, they were notinvented on the spot. They are the product of different, oftendiverging views on what a European model of economicgovernance should look like.The Centre for European Studies (CES) has invited twoauthors, one French and the other German, to provideinsight into the thinking of French and German policymakerswhen it comes to the issue of how the economic governanceof the European Union should be organised.In his contribution, Jean-François Jamet starts by describingFrance’s frustrations with Europe’s past economicgovernance. He then goes on to describe how the economiccrisis has been perceived in France as a window ofopportunity to make up for the missed opportunities of thepast. Werner Mussler begins his article by explaining thedifferent conceptions of economic governance held byFrance and Germany. He then describes how the Germanviews of a monetary union and of the economic crisis haveinfluenced the German conception of economic governance,and goes on to explain how they have shaped certainGerman propositions during the reform discussions. In the4

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EU Economic Governancelast section of this debate paper, CES’s Stefaan De Cortedescribes the European governance model as it has beenand is being decided upon, before providing conclusions onseveral of its specific features. 5

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EU Economic GovernanceEU economic governance:the French viewJean-François Jamet1SummaryThe economic crisis has forced European leaders to reopenthe debate on European economic governance. Traditionally,France has emphasised the importance of closercooperation on economic policy in the EU. This paperanalyses the main structural factors that influence theFrench stance, notably its illiberal economic culture,characterised by the preference for government intervention;the importance given to discretion with regards to economicpolicy; the French fiscal position; the relationship withGermany; and the fear of decline in a globalised world. Aspectrum of French perceptions and reflections oneconomic governance is presented, taking into accountrelevant positions of actors such as French public opinion,government, and political and economic elites. As a result,the ‘French view’ may be characterised by the followingproposals for the reform of EU economic governance: 1. increased institutionalisation of macroeconomic policy coordination in the eurozone, 2. more comprehensive macroeconomic supervision, 3. strengthened financial regulation at the EU and international level,6

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EU Economic Governance 4. growth-oriented economic strategy based on a European industrial policy, and 5. protection against perceived dumping from emerging economies.IntroductionWhen Angela Merkel spoke in February 2010 about the needfor a European economic government it came as a surprise tomany observers. The European economic government wasthought to be a French idea opposed by the Germans who sawit as a temptation to political interference in the independenceof the European Central Bank (ECB).The expression was indeed coined by François Mitterrand in1990 based on the recommendation of the Delors reportpublished in April 1989, which pointed to the need for closercooperation on economic policy that would not be limited tomonetary issues.2 The idea was then pushed unsuccessfully byMitterrand and his Prime Minister Pierre Bérégovoy during thenegotiation of the Maastricht Treaty. In the preparation of theTreaty of Amsterdam, which created the Stability and GrowthPact (SGP) in 1997, then Prime Minister Lionel Jospin againpromoted the idea, leading to the creation of the Eurogroup, agathering of the Finance Ministers of Member States who sharethe euro.3 It remained largely an informal institution until theLisbon Treaty. France has been more silent, however, regardingthe precise definition of European economic governmentduring the recent crisis. Its contribution seemed confined toPresident Sarkozy’s proposal for a regular, official meeting ofeurozone leaders to strengthen economic guidance. 7

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EU Economic GovernanceMerkel’s appropriation of the expression ‘economicgovernment’ was probably a tactical move to take theinitiative on the reform of economic governance and define itsobjective in accordance with the German view of a rules-based government. At the same time, it was a way to forceFrance to go beyond the slogan and make more precise andpractical proposals.Together with the Greek crisis, Merkel’s initiative led to arevival of the debate about European economicgovernance/government in France and beyond. A number ofdecisions had to be made: what kind of macroeconomicsupervision, which crisis resolution mechanism, and whatkind of medium-term growth strategy and politicalleadership? The issues were complex not only on economicgrounds. It was also difficult to know what Member Statescould agree on and what was feasible within the legalframework of the Treaty. Finally, the articulation between theEU and the eurozone remained a question mark.Several months later, a number of projects are on the table.The Commission has proposed a strategy for growth (Europe2020) and made a comprehensive legislative proposal onmacroeconomic supervision. A European Financial StabilityFacility (EFSF) was created in May 2010 to provide financialassistance to eurozone states in difficulty. The EuropeanCouncil of 28–9 October 2010 agreed on a modification ofthe Treaty to create a permanent crisis resolution mechanism.Has a clearer French view on EU economic governanceemerged within this context? It is important to distinguishbetween the internal French debate and the positiondefended in Brussels by the French government. The formeris influenced by political positioning in view of the upcoming8

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EU Economic Governancepresidential election while the latter is developed taking intoaccount the need to find a compromise at the Europeanlevel. However, both are influenced by a number ofstructural factors. First, France has an ‘illiberal’ economicculture,4 meaning that the French are more afraid of marketfailures than government failures and have thereforedeveloped a preference for regulation rather than a market-based economy. The economic crisis has been interpretedas proof that French mistrust of the market was justifiedand that the Anglo-Saxon neo-liberal finance-driven modelwas deemed to fail. Second, France traditionally gives moreimportance to discretion than Germany in the debate abouteconomic policy, especially in times of crisis. While thisposition weakened when the financial crisis turned into apublic finance crisis (the French government is nowexplicitly defending its AAA rating), France still has a largerview of economic governance than one based only on rulesfor macroeconomic supervision, and still believes ingovernment-driven growth-oriented policies. Third, Franceis preoccupied with its role in the EU and by thecompetition for influence with Germany. The Europeanproject has been seen from the beginning as a way forFrance to project its power but this implies thatcompromises found at the European level are acceptableand do not put France in the minority. Support for Europeanintegration has recently been in decline in France as a resultof a perception that French proposals (for instance,exchange rate policy, tax harmonisation, industrial policyand protection of services of general interest) are beingmarginalised. Finally, the French debate is animated by afear of decline in the context of globalisation. De-industrialisation, offshoring and exposure to competitionfrom emerging economies play an important role in publicopinion. 9

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EU Economic GovernanceThis paper is organised as follows. Section one describesFrance’s frustrated expectations vis-à-vis Europeaneconomic governance. Section two explains that the crisis isbeing perceived in France as a window of opportunity toadvance French-style economic governance. The articleseeks to provide a spectrum of French reflections oneconomic governance and to identify common features anddifferences that emerge from an examination of the positionsof relevant actors, notably French public opinion,government, and political and economic elites.French frustrated expectations vis-à-visEuropean economic governanceThe lost second pillar of the Economicand Monetary UnionWhile Germany prefers stable and automatic rules andautomatism, France views rules as one of many instruments.It also sees a need to respond to economic cycles, whichmeans that some importance must be attributed todiscretionary policies supporting growth and employment.In 1989, the Delors Report5 emphasised the need to extendEuropean economic policy beyond monetary policy and,therefore, proposed increased coordination of economicpolicies among Member States. The Economic andMonetary Union (EMU) could not rest only on a monetarypillar (the single currency and the monetary policy of theEuropean Central Bank) but needed a framework to makedecisions on broader economic policy issues. This ‘secondpillar’ of the EMU was not, however, part of the compromise10

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EU Economic Governancefound in Maastricht. Germany agreed to give up theDeutschmark but imposed its culture of economic stabilitybased on rules, implying that an independent ECB shouldnot be exposed to political pressures that might come froma European economic government.From a French perspective, the economic pillar of the EMUwas therefore lost in Maastricht. Subsequent attempts torestore it, such as the negotiation of the Amsterdam Treaty,were only partly successful and institutionalised to a limitedextent. The Eurogroup and the macroeconomic dialogueindeed remained two very informal forums for discussion.Recently, Jacques Delors6 drew attention to the fact that it isimportant that citizens understand that the urgent need tointervene and reform is not only a result of the Greek crisis,but also partly a response to a very weak and inefficientEurogroup.France traditionally prefers government rather than rules-based governance, which is perceived as suffering from ademocratic deficit.7 There is, for instance, a certain mistrusttowards the ECB because its prime objective, keepinginflation low, is seen as leading to unnecessarily reducedactivity and employment8 as well as deflationary risks.9 ManyFrench economists and politicians10 favour a democraticinstitution that would counterbalance the ECB and to whichthe ECB would be accountable, along the model of therelationship between the US treasury, the Congress and theFed. France would also like to see a greater importanceattached to an exchange rate policy, a view supported byJean-Pierre Jouyet11 (who was the French Minister ofEuropean Affairs during the French presidency of the EU in2008), Louis Gallois (EADS’ CEO), and the Conseil d’analyseéconomique.12 11

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EU Economic GovernanceMoreover, there is a clear French preference for discretion. Inthis view, in order to be able to respond adequately todifferent economic cycles, not only monetary policy but alsofiscal policy needs to play a central role.13 In a heterogeneousand, therefore, also sub-optimal monetary union, nationalfiscal policies must play a countercyclical role to dampen theasymmetric shocks that affect some Member States morethan others. In this context, the 3% deficit rule has beenperceived as both too tight (in periods of economicdownturn) and too lax (when the economy is booming).14 Thisperception was revived by the economic crisis. The Frenchgovernment and most French economists have emphasisedthe importance of fiscal stimulus and proposed thecoordination of stimulus policies at the European level.15Another aspect of the discussion of the missing economicpillar of the EMU is the debate about the European budget.Traditionally, the French thought the EU budget too small.16More recently, however, in line with the general climate ofausterity, and taking into account the fact that France hasbecome a net contributor to the budget, the government hasbeen reluctant to increase the EU budget.17The internal market:French priorities denied EU dimension?The French are more reluctant to trust their fellow citizensand institutions than other Europeans.18 This mistrust can beclosely linked to the functioning of the French social model,based on corporatist rules which are detrimental to socialdialogue and the transparency of solidarity mechanisms. Theweakness of social dialogue and the mistrust vis-à-vis themarket in turn justify government intervention,19 which often12

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EU Economic Governanceconsists of defining protective regulations, redistributingrevenues and awarding special status to interest groups,thereby reinforcing corporatism.Since the French favour government intervention in theeconomy, French priorities include social policy, industrialpolicy, tax harmonisation and services of general interest, allelements they want developed at the European level butwhich have been put on hold, to French dismay. Oneexception can be found in the Common Agricultural Policy(CAP), which still represents a large part of the Europeanbudget.An analysis of the French ‘no’ to the referendum on theEuropean Constitution in May 2005 shows the underlyingfactors governing the French perception of the EU.20Roughly two-thirds of the no vote came from left voters,mainly affiliated with the French Socialist Party (PartiSocialiste, PS).21 Left leaders calling for a ‘no’ emphasisedthe danger that the Constitution posed to French socialbenefits. Observers commenting on the no vote focused onthe importance of the social climate in France and workers’discontent with the politics of the French government at thetime.22 In addition, the fierce debate about the ‘Bolkestein’directive23 on the liberalisation of services played asignificant role, as it was associated with the fear of ‘socialdumping’.24 Many in France saw the ‘ultra-liberal’ approachby Brussels as a direct threat to their social rights.25 Thiswas an important element to the French ‘no’ as Franceseemed increasingly in a minority in the debates overliberalisation policies.Further disagreements with Brussels over issues inherentlylinked to French culture, such as the production of rosé 13

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EU Economic Governancewine,26 led to the French raising doubts about whetherinternal market policies could achieve better outcomes thannational policies, or whether they were rather a threat toFrench aspirations.French mixed feelings about the euroEven if there is no consensus in the French elite on thebenefits of the EMU and the internal market, one can arguethat the way they developed actually led to somefrustrations in France. More generally, a vague feeling ofdisenchantment towards European economic governancehas developed.According to polls, the French already had mixed feelingsregarding the definitive adoption of the euro in 2002.27 Infact, the difficult adoption of the Maastricht Treaty28 in 1992revealed reluctance from a significant segment of the Frenchvis-à-vis a single currency and the development of theEMU.29 After 2002, the euro30 was perceived as the maincause of a weaker purchasing power31 as, after steadilyincreasing from 1998 to 2002 by about 3% per year,32purchasing power faltered from 2002 onwards. Thiscorrelation opened the doors for Euro-sceptics. Theperception of the euro as inflationary undeniably weighed onits general image.33In remarkable contradiction with this perception, manyFrench also believe that the focus of the ECB on its inflationtarget and its refusal to consider debt monetisation areideological and come at the expense of economic activityand employment. Criticism used to come from the Frenchfar-left such as Le Nouveau Parti Anticapitaliste (NPA) and14

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EU Economic Governancethe anti-globalist group Attac,34 asking for an end to ECBindependence. More recently, leaders of centre-right partieshave also criticised the ECB’s policy: Nicolas Sarkozy hasfocused on its interest rates35 and Nicolas Dupont-Aignan36on its independence. These criticisms have led to a loss oftrust in the ECB. As a Eurobarometer poll pointed out inSeptember 2009,37 a majority of the French interviewed didnot trust the ECB.As a result, the perception of the euro in France has becomenegative. The German Marshall Fund’s poll shows that only33% of the French interviewed thought that the euro wasgood for the economy.38Revised French expectationsabout European governanceIn nearly 60 years, the French perception of the Europeanproject has radically changed. Expectations have decreased,especially with regard to economic governance. Initially, oneof the main reasons explaining French support for a strongEuropean Union was its own objective of becomingstronger.39 The European Union was seen as a powermultiplier (multiplicateur de puissance) for France.40However, the EU was increasingly perceived as a constraintto power politics. For instance, French businessmen were‘irritated’ by competition rules or environmental and healthstandards that they considered too tight and detrimental toFrance’s competitiveness. In fact, Europe is now perceivedby some as a straightjacket.The French preference for a federalist type of economicgovernance is also declining and a shift towards a more 15

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EU Economic Governanceintergovernmental vision has taken place. Typically,according to President Sarkozy, economic governance is amatter for heads of state and he argues that priority shouldbe given to the Council, a view emphasised during theFrench presidency in 2008. Defiance and mistrust of theEuropean Commission (EC), seen as a purely bureaucraticinstitution disconnected from citizens’ preferences, haveincreased. The French socialists’ programme is no longeropenly federalist and even Commissioner Michel Barnierremarked that ‘the EU is a community of nation-states . . .We will never be a nation, a European people.’41Nevertheless, exceptions do exist and can be illustrated bythe European project of Les Verts/Europe Ecologie42 and therecent creation of the Spinelli group43 on the initiative ofFrench Members of the European Parliament (MEPs).Essentially, one can say that France fears being in theminority within the EU. The French have realised thataccording to the ‘democratic rule’, decisions can beimposed without their agreement. This leads them to believethat important matters should not be decided at theEuropean level. In other words, there is little reason to‘invest’ in the EU. Nevertheless, even if this fear exists, theEU remains an essential component in the plans of theFrench government and elites. They have perceived theeconomic crisis as an opportunity to push a reform agendathat is more consistent with French preferences oneconomic governance.16

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EU Economic GovernanceThe crisis as an opportunity: a renewed claimfor French-style economic governanceThe French position in the current debateabout the reform of European economic governanceReinforced supervision. During the Greek crisis, France andGermany presented conflicting proposals. France originallyrefused the intervention of the International Monetary Fund(IMF) and recommended direct aid to Greece. In contrast,Germany envisaged the possibility of excluding a MemberState from the eurozone, initially refused a bailout plan forGreece and requested that any aid plan be decided by theEU rather than by eurozone countries with the activeinvolvement of the IMF. A compromise was finally reachedunder pressure from financial markets on 9 May 2010 toprovide conditional loans to Greece with the financial andtechnical support of the IMF. Since the Greek crisis, severalproposals have been made to reform European economicgovernance based on an agreement on the need forreinforced economic and financial supervision. In a Franco-German paper44 published in July 2010, followed by acommon declaration on the occasion of the Deauvillesummit in October 2010, agreement was reached betweenFrance and Germany on economic and political sanctionsfor countries which did not respect the Stability and GrowthPact. Even the suspension of voting rights in the Councilwas approved by the French government.45 However, theproposal did not find enough support during the EuropeanCouncil of 28–9 October 2010.46 More generally, the Frenchgovernment supports the reinforcement of multilateralbudgetary surveillance through a better coordination ofnational fiscal policies and the SGP,47 although this view has 17

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EU Economic Governancebeen criticised by left parties which see strict austeritymeasures as a threat to the economy.48 On the contrary,enlarging supervision to aspects of competitiveness,structural reforms, private debt and financial stability seemsuncontroversial in France. This has led the Frenchgovernment to support the German proposal of acompetitiveness pact demonstrating the commitment ofEuropean leaders on that point. This pact has beenendorsed by the European Council on 25 March 2011 underthe name ‘Euro-Plus Pact’ and the 23 governments thathave signed it will hold a summit to assess the results of itsimplementation.From the French point of view, tackling imbalances at theEuropean level should include efforts towards taxharmonisation. The French government has taken steps inthat direction by putting pressure on Ireland to accept aharmonisation of the corporate tax base and by announcingthat it intends to make France’s tax policy similar to theGerman model. At the same time, the French governmenthas recommended action against excessive surpluses bysupporting domestic demand,49 a subject of disagreementwith the German government, which considers that deficitcountries should reform their economies rather than askingGermany to underperform.After some initial misunderstandings, the EuropeanCommission’s proposal of a ‘European semester’, where allMember States present their budgets to the Commissionstarting from March 2011, has been endorsed by the FrenchParliament.50 An influential French MEP, Alain Lamassoure,has even proposed that the review should include acomparison of the largest spending categories in order tobetter assess the Member States’ commitment to the SGP18

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EU Economic Governanceand the Europe 2020 strategy. He also supports thecreation of an interparliamentary conference which wouldensure that national parliaments own the review of nationalbudgets and allow the exchange of best practices.51A crisis mechanism. The French government and mostFrench economists have supported the creation of a crisisresolution mechanism.52 There have been discussions aboutwhat such a mechanism should look like and whether itshould be modelled along the lines suggested by theGerman government. In March 2010, German FinanceMinister Wolfgang Schaüble proposed a EuropeanMonetary Fund in order to be able to provide emergencyliquidity aid to reduce the risk of default by eurozoneMember States who find themselves in financial trouble.However, the French government was opposed from thebeginning to the creation of a European Monetary Funddespite its support of the creation of the EFSF and the factthat the idea first appeared in France.53 There are tworeasons for this: first, the French government is reluctant togive the impression that it wants to create a regionalcompetitor to the IMF in the context of its G-20 presidency;second, it is concerned that envisioning a sovereign defaultin the eurozone, as supported by Mayer and Gros in themost detailed proposal for a European Monetary Fund sofar,54 would lead to financial markets requesting higher-riskpremiums on government bonds, or that a default couldweaken European banks. Nevertheless, France hassupported the creation of a European Stability Mechanism(ESM), which renders the EFSF permanent.Financial regulation. Early on in the crisis, France made thereform of financial supervision its priority. This explains whyFrance negotiated the seat of commissioner in charge of the 19

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EU Economic Governanceinternal market and financial services, which is now held byMichel Barnier. The French government has pushed for thecreation of a supranational framework using Europeanauthorities, as proposed by Commissioner Barnier. As aresult, the European Systemic Risk Board and three otherEuropean agencies have been created. Furthermore, theCommission announced it would propose a package on anew EU framework for crisis management in the financialsector during 2011.55 France, alongside Germany, alsobacks a European financial transaction tax. The Frenchgovernment is also trying to push this proposal in thecontext of the G-20 presidency, which is at the top ofPresident Sarkozy’s 2011 economic agenda.French advocacy of an enlarged conceptionof economic governanceIn the current debate about the reform of Europeaneconomic governance, France is also pushing for anenlarged concept of economic governance.An emphasis on growth. Traditionally, France has placed theaccent on growth rather than stability. Recently, it hasadvocated a more ambitious European industrial policy.56Jacques Delors has even recommended the creation of aEuropean Energy Community.57 At the Commission level, theSingle Market Act, proposed by Commissioner MichelBarnier58 to relaunch the European Single Market, isparticularly focused on small business.59 It is also explicitlylinked to the Europe 2020 flagship initiatives on industrialpolicy and innovation. This illustrates a shift in the way thesingle market is understood.20

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EU Economic GovernanceMore generally, there have been several proposals in Franceto increase resources for European projects. A recent reportby the French Assemblée Nationale60 advocates aninvestment strategy at the EU level.61 In the context of aconstrained EU budget, it supports President Barroso’sproposal of European borrowing for EU projects and calls fora ‘grand emprunt européen’, a proposal supported by themain political parties. Unlike the French government, theSocialist Party and Europe Ecologie also recommend anincrease in the EU budget and the establishment of aEuropean carbon tax. On the centre-right side, AlainLamassoure advocates an increase of EU resources usingnational contributions to EU projects. Finally, several Frencheconomists have advocated the creation of Eurobonds, i.e.the pooling of government debt within the euro area, eitherto provide the resources for projects or to reduce borrowingcosts faced by Member States.62French protectionism? The claim for fair tradeFrench opinion increasingly favours some kind of protectionagainst what is perceived as ‘unfair’ competition fromemerging economies.63 In a recent Eurobarometer poll,64 only39% of people interviewed responded that they benefit frominternational trade, a low figure explained mainly by thebelief that international trade creates unemployment andreduces the quality of products. Moreover, 60% of thoseinterviewed were prepared to pay more for products orservices from companies that respect the environment and57% would pay more for products or services fromcompanies that respect labour rights and apply high socialstandards. 21

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EU Economic GovernanceAs a result, many parties, including the centre-right Union fora Popular Movement (Union pour un Mouvement Populaire,UMP) and the Parti Socialiste, promote a new form ofEuropean protectionism. Sarkozy’s advocacy of thepreference communautaire65 played an important role in the2007 presidential campaign. According to PresidentSarkozy, the EU should protect citizens66 from the threats ofglobalisation. In this view, the EU should create a Europeanindustrial policy protecting European businesses andpromoting its champions.67 Similarly, French socialistsdenounce social and environmental dumping and argue for ajuste échange (fair trade).69 Concretely, this meansestablishing social and environmental taxes on imports fromcountries that do not respect social and environmentalstandards.Conclusion: room for compromise?Despite the absence of consensus on certain issues, theFrench view on economic governance is relativelyconsistent. It favours: 1. an increase in the degree of institutionalisation of macroeconomic policy coordination in the eurozone, 2. more comprehensive macroeconomic supervision, 3. a strengthened financial regulation at the EU and international level, 4. a growth-oriented economic strategy based on a European industrial policy, and22

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EU Economic Governance 5. protection against perceived dumping from emerging economies.The French government’s priority in 2011 is the G-20presidency. In that respect, it will need the Europeaneconomic agenda to move forward. It will also seek thesupport of its European partners, especially Germany andthe UK. It is therefore probable that France will seekcompromise on the main issues with regard to Europeaneconomic governance: reinforced economic policycoordination, convergence in competitiveness andadvancement of the financial regulation agenda. In themedium term, the question of the European strategy willbecome more important and France is likely to support theCommission’s flagship innovation and industrial policyinitiatives. Alongside structural reforms, a compromise couldalso be sought around the definition of a Europeaninvestment strategy, involving actions both at the EU andMember State level, which would add a second, growth-oriented pillar to the reform of European economicgovernance, and may help to reduce intra-Europeanimbalances as well as to avoid a double-dip recession.However, as the 2012 presidential election approaches,French politicians are also more likely to move protectionismto the fore or take a tough stance with regard to the EUbudget. 23

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EU Economic GovernanceNOTES1 I am very grateful to Fanny Brûlebois and Famke Krumbmüller for their excellent research assistance and to Nicolas Jabko for the discussions we have had on the subject.2 For an analysis of the history of the concept of European economic government, see F. Layer, La gouvernance économique de l’Europe (Paris: L’Harmattan, 2006).3 Eurogroup meetings are also attended by the Eurogroup president, the commissioner for economic and monetary affairs and the president of the European Central Bank.4 See T. Chopin, ‘La France, l’Europe et le libéralisme’, Commentaire, 115 (2006), 669–78, and Y. Algan and P. Cahuc, La Société de défiance (Paris: Editions rue d’Ulm, 2007).5 Committee for the Study of Economic and Monetary Union, Report on Economic and Monetary Union in the European Community, Office for Official Publications of the European Communities (Luxembourg, 1989).6 ‘L’Europe attend les architectes’, Le Figaro, 15 June 2010, accessed at http://www.lefigaro.fr/politique/2010/06/15/01002- 20100615ARTFIG00681-delors-l-europe-attend-les-arch itectes.php on 17 May 2011.7 J.-P. Fitoussi, La règle et le choix : de la souveraineté économique en Europe (Paris: Seuil, 2002).24

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EU Economic Governance27 See Ipsos, ‘Euro : monnaie unique, opinions plurielles’, (2002), accessed at http://www.Ipsos.fr/Canalipsos/articles/1045.asp on 13 November 2010.28 Results for the French referendum on the ratification of the Maastricht Treaty in 1992: 51.04% yes, 48.96% no. For details consult the French Interior Ministry Web site: http://www.interieur.gouv.fr/sections/a_votre_service/res ultats-elections/rf1992/000/000.html.29 I. Ramonet, ‘Survie’, Le Monde diplomatique 474 (1993), 1.30 Some academics argue that there is no link between the decrease in purchasing power and the establishment of the euro. De Silguy, former EU Commissioner for Economic and Financial Affairs, has stated, ‘The idea that the decline in consumers’ purchasing power is a result of the euro is a myth.’ See ‘De Silguy: “Decline in purchasing power is not the euro’s fault”’, EurActiv, 19 January 2009, accessed at http://www.euractiv.com/en/euro/silguy-decline- purchasing-power-euro-fault/article-178590 on 13 November 2010.31 ‘57% des Français accusent l’Euro’, Le Nouvel Observateur, 23 June 2006, accessed at http://tempsreel.nouvelobs.com/actualite/economie/200 80128.OBS7639/57-des-francais-accusent-l-euro.html on 14 November 2010.32 See the French Senate report, ‘L’évolution du pouvoir d’achat des ménages : mesure et perception’, Service28

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EU Economic Governance des Études économiques et de la Prospective Délégation pour la planification, December 2006, accessed at http://www.senat.fr/commission/planification/notes/evo lution_pv_achat.pdf on 17 May 2011.33 C. Lemonnier, ‘L’Union monétaire, l’euro et l’opinion publique’, Bulletin de la Banque de France 171 (2008), 74.34 A criticism of the independence of the ECB by the French anti-globalist organisation Attac can be accessed at http://local.attac.org/paris15/documents/reflexion/CR8 -6.html.35 On that point, see AFP, ‘Sarkozy regrette la hausse des taux de la BCE’, Le Point, 5 July 2008, accessed at http://www.lepoint.fr/actualites-politique/sarkozy- regrette-la-hausse-des-taux-de-la-bce/917/0/258236 on 17 May 2011.36 Nicolas Dupont-Aignan is a French MP and a declared candidate for the 2012 presidential election. His positions on the euro and the ECB are presented on the web page ‘Agonie de l’euro : les eurocrates au bord de la crise de nerfs !’ accessed at http://blog.nicolasdupontaignan.fr/post/2010/05/18/Ag onie-de-l-euro-%3A-les-eurocrates-au-bord-de-la- crise-de-nerf-! on 14 November 2010.37 Eurobarometer 72 / QA14.4, September 2009. 29

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EU Economic Governance accessed at http://www.assemblee- nationale.fr/13/europe/c-rendus/c0150.asp#P5_228 on 14 November 2010. Furthermore, French UMP MPs address the question of sanctions in their proposal ‘Propositions en vue de l’établissement d’une gouvernance économique de l’Union européenne’, accessed at http://www.deputes-ump.fr/.46 See the Conclusions of the European Council of 28–9 October 2010 at www.consilium.europa.eu.47 This view is shared by most French political parties such as Parti Socialiste, Europe Ecologie, MoDem and UMP. Some economists argue instead for more decentralised surveillance, for instance, through an independent fiscal committee and constitutional rules—see for instance, J. Delpla, Réduire la dette grace à la Constitution : créer une règle budgétaire en France, Fondation pour l’Innovation Politique (Paris, 2010)—a path partly followed by the French President, who agreed to a constitutional rule but not to an independent fiscal committee.48 See T. Coutrot et al., ‘Manifeste des économistes atterrés’, Le Monde, 15 September 2010, and the column published by M. Aubry and S. Gabriel, President of the German SPD, ‘Pour une relance progressiste du projet européen’, Le Monde, 14 July 2010.49 In March 2010, French Minister of Economic Affairs Christine Lagarde urged Germany to tackle its surplus and to boost domestic demand because otherwise it would endanger the competitiveness of its European partners. See the following articles in Der Spiegel and 31

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EU Economic Governance Le Monde: http://www.spiegel.de/international/europe/0,1518,683 567,00.html and http://www.lemonde.fr/economie/article/2010/03/15/zo ne-euro-christine-lagarde-s-en-prend-a-la-politique- economique-allemande_1319150_3234.html.50 The French National Assembly endorsed the principle of a European semester. See Assemblée Nationale, ‘Rapport d’information sur le gouvernement économique européen’, Rapport d’information 2922, 27 October 2010, accessed at http://www.assemblee- nationale.fr/13/europe/rap-info/i2922.asp on 14 November 2010. The French UMP MPs addressed this principle in their report ‘Propositions en vue de l’établissement d’une gouvernance économique de l’Union européenne’, accessed at http://www.deputes- ump.fr/ on 13 November 2010.51 A. Lamassoure, ‘Budgetary Crisis: How Can We Protect the Future of Europe?’, European Issues. Policy Papers of the Robert Schuman Foundation 181, Fondation Robert Schuman (2010), accessed at http://www.robert-schuman.eu/print_qe.php?num=qe- 181 on 13 November 2010.52 France supported the German request for a modification of Article 136 of the Treaty on the Functioning of the European Union to create such a mechanism at the European Council of 28–9 October 2010. A concrete proposal was put forward by an influential French economist, Jean Pisani-Ferry. See F. Gianviti et al., ‘A European Mechanism for Sovereign Debt Crisis Resolution: A Proposal’, Bruegel Blueprint Series, 9 November 2010.32

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EU Economic Governance53 S. Cossé and G. Klossa, ‘Pour un Fonds monétaire européen’, Les Echos, 27 February 2009, 15.54 D. Gros and T. Mayer, Towards a Euro(pean) Monetary Fund, Centre for European Policy Studies, 17 May 2010.55 For the European Commission’s position on crisis management, see http://ec.europa.eu/internal_market/bank/crisis_manag ement/index_en.htm.56 Présidence de la République française, ‘Vision du Président de la République pour l’Europe’, accessed at http://www.elysee.fr/president/les-dossiers/europe/la- vision-du-president-de-la-republique-pour.9580.html on 7 November 2010.57 J. Delors, ‘A Call for a European Energy Community’, foreword in S. Andoura, L. Hancher and M. Van Der Woude, ‘Towards a European Energy Community: a Policy Proposal’, Notre Europe Studies & Research 76 (2010).58 On 27 October 2010, the European Commission presented the Single Market Act. The press release and the act are available at http://europa.eu/rapid/pressReleasesAction.do?referen ce=IP/10/1390&format=HTML&aged=1&language=EN& guiLanguage=en; accessed on 13 November 2010.59 Part 1 of the Single Market Act is entitled ‘Strong, Sustainable and Equitable Growth for Business’. 33

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EU Economic Governance60 Assemblée nationale, ‘Rapport d’information sur le gouvernement économique européen’ (see n. 52 above).61 On the same subject, see the European Parliament, ‘Report on the Financial, Economic and Social Crisis: Recommendations Concerning Measures and Initiatives to be Taken’, draft final report, 17 March 2011, accessed at http://www.europarl.europa.eu/activities/committees/dr aftReportsCom.do?language=EN&body=CRIS on 17 May 2011. The rapporteur was a French socialist MEP, Pervenche Berès. See also J.-F. Jamet and G. Klossa, ‘A Europe that Dares, in the Interest of Europeans’ (Paris: EuropaNova, May 2010), available at http://www.jf-jamet.eu/upload/europe-that-dares- jamet-klossa.pdf.62 See for instance J. Delpla and J. von Weizsäcker, ‘The Blue Bond Proposal’, Bruegel Policy Brief, May 2010.63 Although most French economists reject protectionism, Maurice Allais, a French Nobel Prize laureate in economics, explicitly advocated it. See M. Allais, La Mondialisation : La destruction des emplois et de la croissance : l’évidence empirique (Paris: Clément Juglar, 1999).64 Eurobarometer, ‘International Trade’, Special Eurobarometer 357, November 2010.65 For a better understanding of Sarkozy’s view on the ‘préférence communautaire’, see http://archives.u-m- p.org/propositions/?id=05_preference_communautaire.34

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EU Economic GovernanceEU economic governance:the German viewWerner Mussler1SummaryWhen the financial and economic crisis in the EU became ageneral debt crisis in some of its Member States, theydisagreed both on how to react in the short run and on how toreform the rules of the monetary union to stabilise the euro inthe long run. The German government played a crucial role inboth discussions: First, it prevented the impulsive granting offinancial aid to the ailing countries and insisted on theinvolvement of the International Monetary Fund (IMF).Second, after the European Financial Stability Facility (EFSF)was established, it called for far-reaching reforms of theStability and Growth Pact to prevent another crisis. Last, it cuta strange deal with France to amend the European treaties.France was rewarded with only a modest strengthening of thepact. The behaviour of the German government in the crisiswas striking in at least three aspects. Its political style wasunusually rude, and it was considered by some other MemberStates to be impertinent and obstinate. Although it clearlyasked for a far-reaching reform of the stability pact, it avoidedan explicit position on economic governance in a moregeneral sense, and it clearly dismissed any notion ofgouvernement économique. It demanded an amendment ofthe European treaties without specifying why it was needed.This behaviour can be explained primarily by domesticpressure. First, the German public knew well enough thatGermany would become the main paymaster for any 43

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EU Economic GovernanceEuropean assistance. Second, and most important, the aidmeasures were rightly considered as a breach of the centralprinciples of the monetary union on which Germany hadinsisted when the euro was created. Particularly, the no-bailoutclause was breached, and the independence of the EuropeanCentral Bank endangered. These developments implied a legalprobability: the German Constitutional Court, which had setlimits to European integration on several occasions, couldannul any aid decision as a breach of the Treaty.2 Thisexplained the call for a Treaty change.Differing terminology and different conceptionsWhen the heads of state from the euro area agreed onemergency assistance for Greece in March 2010, they agreedat the same time that the ‘economic governance of theEuropean Union’3 had to be improved. Their commonunderstanding was that the institutional framework of thecurrency union should be amended to prevent an event likethe Greek crisis from recurring. The creation of the task forceled by the President of the European Council, Herman VanRompuy, was the logical consequence. However, the heads ofstate disagreed from the beginning on what should beimproved.The discord was apparent even in the text of the heads ofstates’ conclusions. The neutral wording of ‘economicgovernance’ in the English version differed considerably fromthe French version, which asked for the reinforcement of agouvernement économique,4 and from the German version,which referred to the need for more wirtschaftspolitischeSteuerung.5 From a German perspective, the three terms donot have anything like the same meaning. And it seems clear44

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EU Economic Governancewhat gouvernement économique means: a concept ofFrench interventionism which has to be rejected. In contrast,the English and the German versions seem more to concealthan to explain what they mean. These technocratic phraseslack content and are neither translatable (the English version)nor used (the German version).The differences are more than merely semantic. Theydocument the far-reaching disagreement between Germanyand France in fundamental questions of economic andmonetary policy, including the role of the state. Beforeassessing the underlying conceptual differences, we need toexplain the political (or even historical) background of thedifferences in wording. They reflect two different debates,even if these debates are clearly linked. The first followedthe decision to establish a currency union in the early 1990s,and referred to the potential influence of politics on thecentral bank. The second debate arose in the financial andeconomic crisis, and refers more generally to the reform ofthe institutional framework of the euro area.The starting point of the first debate was that France couldnot accept the idea of an independent central bank with nopolitical constraints. In the wake of the Maastricht Treaty, theidea of gouvernement économique was to establish apolitical counterpart to the European Central Bank (ECB) inorder to politically determine (or at least influence) monetarypolicy. France principally disagreed with the institutionalmodel of the ECB established by the Treaty since it followedthe model of the Bundesbank. The dissent was based on adiffering understanding of what a central bank should do.The German interpretation was (and is) that the ECB’s onlyobjective should be to maintain price stability, and the central 45

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EU Economic Governancebank should pursue this objective without politicalinterference. From the French perspective, it is up todemocratically elected politicians (representing the volontégénérale) to execute every policy, including monetary policy.An independent authority like the ECB, obligated only byabstract rules, is incompatible with this idea. Consequently,the French concept does not allow for a one-dimensionalapproach to monetary policy. It calls for a central bank whichnot only tries to maintain price stability but also pursuesobjectives such as boosting economic growth. If there were atrade-off between the two objectives, it would be up to thepolitical actors to weigh in favour of one or the other.Since France could not prevent the establishment of anindependent central bank under the Treaty, the governmentin Paris always called for a gouvernement économique inorder to contain the ECB.6 The idea was to establish apowerful institution at the eurozone level which representedthe political will of Member States and could weaken theposition of the ECB. The launch of the eurogroup (consistingof the Finance Ministers of the eurozone) did not really meetthe French requirements.France has maintained this first concept of gouvernementéconomique to date. Since its point of reference wasmonetary policy, it applied to the eurozone rather than to theEU as a whole. French calls for gouvernement économiquegained momentum again when the financial crisis erupted.President Nicolas Sarkozy, who presided over the Council ofthe EU at the peak of the crisis in the second half of 2008,further promoted the idea by convening an extra summit ofthe heads of state of the eurozone in Paris in October 2008.7He argued that this unprecedented meeting was necessarygiven the political challenge created by the crisis. At the46

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EU Economic Governancesame time, however, he called for making this special type ofeurozone meeting a permanent fixture. This proposal notonly divided the EU into important (euro) and unimportant(non-euro) countries, it also aimed at destroying (or at leastmarginalising) the eurogroup. Sarkozy’s idea obviously wasthat the heads of state would have more power to restrictthe ECB than the eurogroup.Although his suggestion about the eurozone meetings failedat first,8 Sarkozy continued to put pressure on the ECB. Heclaimed victory in May 2010 when the European Councildecided to establish a European rescue mechanism forailing euro states. The decision included the commitment ofthe ECB to purchase government securities henceforth. Athis press conference afterwards, Sarkozy proclaimed that hehad achieved a véritable gouvernement économique for theeurozone. What he meant was that the independence of theECB had been broken at last.9Even if France still sticks to this narrow interpretation ofgouvernement économique, the term is currently being usedsomewhat differently, particularly in the English and Germanversions. In its alternative meaning, ‘economic governance’comprises more or less the whole legal and institutionalframework which is considered necessary to preventfinancial or economic crisis. The somewhat cloudy term‘economic governance’ was introduced by the EuropeanCommission issuing its first of several communications inMay 2010.10 All communications, (non-)papers and reportsissued by different European institutions used the sameterm. The different translations reflect the differentinterpretations of what should be reformed. France still aimsat a gouvernement économique in the first sense, whereasGermany aims at something else. 47

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EU Economic GovernanceWhen assessing the German position, one has to distinguishbetween its conceptual basis and the political pragmatismthat its leading representatives observed in the crisis. Overthe past two years, German policy withdrew considerablyfrom what may be called the German model of monetaryunion. However, the attitude of the federal government—which was criticised several times by other MemberStates—can only be understood in the context of itsbackground. We present this model in section two. Insection three, we discuss the perception of the crisis in theGerman public before assessing the role of German policy inthe reform discussion in section four. In section five, wefocus on the German effort to redirect the discussion oneconomic governance towards a new—institutional—meaning. Section six concludes this paper.The German conception of monetary union:a rules-based approachOrdnungspolitik is a German invention, and it seemsimpossible to translate the term.11 However, the conceptconsiderably influenced the institutional framework of the EU,particularly its competition rules; and the model of a ‘socialmarket economy’, which is based on the political philosophyof Ordoliberalism from the Freiburg School, found its way intothe Lisbon Treaty.12 In a nutshell, Ordnungspolitik is a rules-based approach to politics. It defines abstract rules as aninstitutional framework for economic activity, applicable ‘toan unknown and indeterminable number of persons andinstances’.13 In the ordoliberal view, the rules should primarilydefine those actions which are prohibited rather thanprescribe any specific conduct. To put it generally, the stateshould set only the legal framework within which private48

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EU Economic Governanceactors can proceed as freely as possible. At the same time,the rules should constrain political interference.The institutional framework of the European monetary unionwas clearly devised on ordoliberal ideas. This can beexplained by the explicit German reluctance about amonetary union at the beginning of the 1990s. TheBundesbank claimed that a monetary union could not beachieved without establishing a political union. The Germancitizens, still traumatised by the experience of Germanhyperinflation in the 1920s, did not like the idea of giving theDeutschmark and the Bundesbank away. A majority ofGerman economists warned against establishing amonetary union.14 Given this resistance, it was obvious fromthe beginning that Germany would only accept the euro ifmonetary rules were designed on the German model.In a nutshell, these rules are based on three central principles: 1. The central bank is obliged to exclusively pursue the objective of price stability, free of political interference. As Otmar Issing, the former chief economist of the ECB, put it, the monetary union should be ‘as non- political as possible’.15 2. The monetary union implies only the centralisation of monetary policy; fiscal policies remain at the national level. Therefore, a system of fiscal rules is needed at the EU level to confine public expenditure in the Member States and to ensure solid public finances. The Stability and Growth Pact is based on this rationale. 3. To exclude moral hazard in fiscal policies and to further safeguard the principle of sound public finances, no 49

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EU Economic Governance single Member State (or the Union as a whole) need assume liability for the public debt of another state. This rule is laid down in the no-bailout clause of the Treaty.In the current discussion, the latter principle gainedparticular relevance. This results from a change of attitudetowards the EU within Germany in recent years. An earlierwillingness to contribute the majority of the EU budgetdeclined, and a slogan reflecting this became increasinglypopular: Germany must not continue to be the paymaster ofEurope. Whether these complaints are justified is moot. But,given their existence, any German politician must avoidexpanding the country’s financial contribution to ‘Europe’.The perception of the crisis among the German publicIn the first decade of monetary union, the German public stilllooked at the common currency with mistrust. Even if thenotion that the euro turned out to be a ‘Teuro’16 was notreally justified, it remained quite popular. However, Germanconfidence in the stability of the euro rose after the ECBseemed to obtain independence from political interferenceand the inflation rate did not spike. When it turned out in2004 that Greece had faked its deficit figures in the yearsleading up to its accession to the eurozone in 2001, this wasnoticed indignantly in Germany, but without attracting muchinterest.The Greek case was not the only breach of the rules. Thesecond case gained much more attention in Germanybecause it involved the German government. In November2003, the German and French ministers of finance,50

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EU Economic Governancesupported by Italy, refused to accept the Commission’sproposal to open deficit procedures against their countries.This was a clear violation of the rules and of the stabilitypact. Since the Commission could not obtain anunambiguous ruling from the European Court of Justice inthe case, it gave in and launched a proposal to change therules. The Council agreed happily, and thus the rules weresoftened considerably in 2005.The reaction in Germany was ambiguous. The governmentwas criticised for having broken (and then amended) the‘German’ rules of the pact,17 but German Finance MinisterHans Eichel could claim that he had averted further damageto the German taxpayer by avoiding the deficit procedure.Even if this was a dubious claim, Eichel succeeded to acertain extent: there was, at least at first glance, no moneyat stake. One could argue that the breach of the pact coulddestabilise the euro, but this conjecture was too obscure toreally take hold.The current German debate on economic governance cannotbe understood without taking into account a further elementwhich is not directly linked with the economic issues. Theenactment of the Maastricht Treaty not only initiated adiscussion on monetary union, it also kicked off a moregeneral debate on the legal limits of European integration andon the future of the nation state. For many Germans, theenhancement of EU competencies in the Treaty went too far.The German Constitutional Court set clear legal limits tofurther integration in two important rulings. In its judgment onthe Maastricht Treaty of 1993, it not only stated that Germanmembership in the EU must not threaten the legal structureof Germany as a federal state, which also meant that the EUcould not be transformed into a federation; it also defined the 51

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EU Economic Governanceconditions under which Germany could convey nationalcompetencies in monetary policy to the EU. It defined themonetary union as a ‘community in stability’ and explicitlymentioned provisions of the Treaty which were to secure thestability of the euro: among others, it listed Article 124 of theTreaty on the Functioning of the European Union (TFEU;formerly Article 102 of the Treaty establishing the EuropeanCommunity, TEC), which excludes the privileged access ofMember States to financial institutions, and Article 125 of theTFEU (formerly Article 103 of the TEC) which constitutes theno-bailout clause.In its judgment on the Lisbon Treaty of 2009, the Courtrestricted the transfer of national competencies to the EUlevel even further. It expressed its intention to act as aguardian of the principle of conferral and of the subsidiarityprinciple. Following the ruling, every extension of politicalaction at the EU level which is legitimised only by some‘undetermined authorisation’ in the Treaty will be treated bythe Court as if it requires an amendment. To put it moresimply: every EU action which is not clearly covered by theTreaty requires a change of the Treaty.Before the outbreak of the euro crisis, the German attitudetowards monetary union was thus influenced by a strongfeeling that German financial support for ‘Europe’ shouldnot increase uncertainty about the stability of the euro, theperception that the rules of the stability pact had alreadybeen softened and the intention of the Court to constrainEU action. All these elements have to be considered whenassessing the German position in the crisis.As it became evident in early 2010 that Greece would getinto considerable financial trouble and possibly need help,52

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EU Economic Governancecrisis management seemed to follow a pattern: mostMember States and the Commission were eager to help;only Berlin held back. It was clear to the federal governmentthat Germany would have to carry the major financialburden. From February 2010 Chancellor Angela Merkel triedto impede or at least delay financial assistance for Greece.At first she argued that it was too early to decide onanything since Greece had not asked for help. Then sheclaimed that the conditions for granting credit had to befixed before any credit would be granted. Then sheenforced the involvement of the IMF.It is hard to tell whether the crisis deteriorated because ofher reluctance or whether it was mitigated by her insistenceon high standards to be fulfilled by Greece. At any rate, thelate decision to grant loans failed to calm the markets. Onthe very day that heads of state and government endorsedfinancial assistance, the situation grew even more acute.Consequently, the EU states concluded that a generalrescue mechanism was necessary to safeguard countriessuch as Portugal, Spain and Ireland from Greece’s fate.Merkel stressed afterwards that the IMF would not havebeen involved either in the assistance for Greece or in thegeneral crisis mechanism had she not been so relentless. Itwas obvious, however, that her attitude was based more ondomestic policy motives than on concern about aneconomically sound solution. Elements of the German presshad led a harsh campaign against financial assistance forthe ‘sloppy’ Greeks. Some backbenchers in the GermanBundestag had urged the government in Athens to sell allthe uninhabited Greek islands before asking for help.Economists and lawyers had warned against a possiblebreach of the no-bailout clause.18 Merkel thus explained to 53

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EU Economic Governanceher European partners that a German contribution tofinancial assistance would be conceivable only as an ‘ultimaratio’—in case the ‘financial stability of the eurozone as awhole’ were in danger. One might add that her waiting forthe ‘ultima ratio’ case was also influenced by the election inNordrhein-Westfalen, which took place on the weekend ofthe ‘crisis summit’ of 9 May 2010.The German public responded as expected to theassistance for Greece and the rescue mechanism. Harshcriticism prevailed, and it referred both to the amount ofmoney which Germany had to contribute and to the obviousbreach of the rules. The ECB got particular attention sinceits president, Jean-Claude Trichet, had agreed in Brusselsto the ECB’s future purchase of government bonds.19 Thisnot only meant a de facto increase of money supply(implying further inflationary risks) but also a breach ofArticle 124 TFEU. Additionally, since Trichet had agreed onthe new ECB policy when he met the heads of state andgovernment, the suspicion grew that the ECB had also lostits independence from political interference.20The general notion in Germany at that point was that thewhole of the ‘German’ institutional model for monetaryunion had been jettisoned. Not only had the stability pactfinally been invalidated, the no-bailout clause had beendestroyed as well, and even the independence of the ECBhad been challenged. Monetary union with a stablecurrency had been transformed into a transfer union. AndGermany had to pay the bill.21 It did not take long until thefirst economists and lawyers announced an appeal againstthe EU decisions. They claimed that the decisions breachedArt. 124 and 125 TFEU, and they referred to theConstitutional Court’s Maastricht ruling that Germany would54

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EU Economic Governancehave to leave the eurozone if the stability of the euro couldnot be secured.22The German position in the current reform discussionAgainst this background, it came as no surprise that theGerman government asked, from the beginning, for far-reaching reforms of the institutional framework. In his ‘KeyProposals to Strengthen the Euro Area’ of 19 May 2010,Finance Minister Wolfgang Schäuble argued that theCommission’s proposals of a week earlier did not go farenough.23 Even then, he had stressed that ‘all of themeasures will need a solid legal basis . . . If our goal is tocreate a strong and lasting framework for Monetary Union,we must also take the possibility of amendments to theTreaty into consideration’.Like the Commission in its first communication on economicgovernance,24 Germany called for reforms in three areas: thestrengthening of the stability pact; better economic policycoordination (including a ‘competitiveness review’) and thedevelopment of a ‘crisis resolution framework’. WhereasSchäuble’s suggestions were elaborated in detail in the firstarea, they were vague in the other two. The Minister seemedclear on how to improve the stability pact: better budgetarysurveillance at an early stage; embedding the principles of thepact more firmly in national budgetary planning, as Germanydid when introducing a constitutional limit to state borrowing;suspending EU funds designated for deficit countries; fasterprocedures; and suspending voting rights in the Council.The German debate on the issue of competitivenessconcentrated on the alleged harm that ‘Europe’ could cause 55

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EU Economic Governanceto Germany by undermining the export industry andintruding into collective bargaining rights. This anxiety wasexaggerated. It was politically clear from the beginning thatany common surveillance of economic policies wouldconcentrate on countries with current account deficits andnot on Germany. Moreover, the discussion was steered inthe wrong direction. Nobody in German politics seemed toconsider whether the whole construction of‘competitiveness surveillance’ made any sense. It did not.In a market economy, the only way to level ‘macroeconomicimbalances’ is by flexible prices and wages. Using politicaltools to restore balance would be conceivable only in acompletely state-directed economy, and even then it wouldprobably fail.The issue of how to establish a functioning ‘crisismechanism’ was not discussed much at first. Everyonefigured that such a mechanism required a Treatyamendment, and the members of the task force agreed tofirst find a common understanding of the topics which didnot require a Treaty change. The public discussion inGermany thus concentrated on tightening the rules of thepact and on ‘competitiveness surveillance’. To someobservers, the latter constituted, in a way, theWirtschaftsregierung they always wanted to prevent.But generally, a kind of consensus emerged in the politicaland academic discussion in Germany during the summer.Most people agreed that Member States’ economic policiesshould be coordinated more thoroughly without creatingany new European competencies, that the control ofnational fiscal policies should be strengthened along thelines of the Schäuble paper mentioned above and thatprovisions should be taken to exclude moral hazard in the56

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EU Economic Governancefuture and to avoid a permanent transfer union. Everybodydismissed the idea of gouvernement économique in theFrench sense.25Schäuble came out with another paper in September withspecific proposals on how automatic sanctions andaccelerated deficit procedures should be enforced.26 Hisrequirement that the sanctions had to be as ‘automatic’ aspossible corresponded to the ‘old’ German philosophythat any decision in the monetary union should followabstract rules—that is, it should be as non-political aspossible. It had been generally acknowledged that thestability pact had failed primarily because of the heavyinfluence which the Member States could exert on deficitprocedures. Since it was up to them to decide every stepof the procedures, the enforcement of the rules alwaysdepended completely on political discretion in the Council.There, no Member State really has an incentive to enforcesanctions against another state since it could be apotential deficit country in the future. It thus turned outthat fiscal sinners decided upon sinners. As a result, theCouncil has never imposed fines upon a Member State,even though there have been grounds for it to do so onmore than one occasion.Unlike France, Schäuble supported the Commission’sapproach: removing as many discretionary elements aspossible from the procedures and introducing a kind ofautomatism. Under this system, the Commission wouldtrigger the procedure and decide upon sanctions as soonas the public deficit or public debt in a country became toohigh, as measured by objective criteria. Following theCommission’s proposal, the Council would be able to stopthe sanctions only by qualified majority. 57

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EU Economic GovernanceTo a large extent, the Commission’s proposals on economicgovernance of 29 September27 conformed to the Germanrequests at that stage.28 The federal government thusgenerally welcomed them, particularly the suggestion forrules-based procedures. However, Merkel again emphasisedher insistence on an amendment of the Treaty. Her mainconcern was the possibility of suspending voting rights and,again, the establishment of some ‘crisis mechanism’ whichshe did not describe in more detail. She mentioned only thatit should ensure that private investors be included when itcame to restructuring the debt of a bankrupt Member State.At the same time, the Chancellor rigorously dismissed theidea of extending the EFSF, which expires in 2013.At the beginning of October 2010, days before the lastmeeting of the task force, the German position was thusunambiguous. The federal government generally supportedthe whole of the Commission’s proposals on strengtheningthe pact and also on the future establishment of a‘competitiveness procedure’, but wanted to go further. Itparticularly asked for more ambitious rules for the stabilitypact. It was obvious, though, that France would not agree toany further measures to establish a truly rules-basedenforcement of the pact. The French government hadalways claimed that decisions on sanctions could not betaken by a bureaucratic body like the Commission, but hadto be politically legitimised, falling, therefore, to the Council.The old German–French conflict over ‘rules-based’ or‘political’ governance arose again.Angela Merkel and Nicolas Sarkozy resolved it by cutting asurprising deal. In a bilateral agreement signed at Deauville,they came up with acceptable conclusions for the taskforce, which had its final meeting on the same day in58

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EU Economic GovernanceLuxembourg.29 Germany refrained from its request tosanction high deficit states automatically. In return, Francesupported the German call for an amendment of the Treatyto allow for establishing the suspension of voting rights andincluding a well-defined ‘crisis mechanism’.The closing report of the task force was clearly based on theDeauville declaration, even if several representatives ofsmaller countries protested against this bilateral approach ofthe German–French ‘directorate’. 30 The task forcesuggested a sanction mechanism much ‘less automatic’than that proposed by the Commission. And it added afurther element which will weaken the strengthening of thepact: sanctions can be imposed only after a delay of sixmonths.31As a result of the Deauville declaration, the discussion oneconomic governance at the following European Councilwas not between the usual antagonists, that is, Germanyand France, but between those two and the rest of the EU,particularly the smaller Member States. It resulted in a nottoo surprising log-rolling agreement. In the run-up to themeeting, it had already become apparent that the proposalto suspend voting rights would be refused by most heads ofstate and government. Therefore, there was no risk forSarkozy in agreeing to the German request. He knew thatMerkel would not be able to get it through. On the otherhand, nobody disputed Merkel’s general demand that a‘crisis mechanism’ should be permanently established. Theonly argument was over whether a Treaty amendment wasnecessary. Jean-Claude Juncker, President of theeurogroup, who had already criticised the Deauvilleagreement, teased Merkel about making a fuss ‘trying toenforce something which everybody agrees on anyway’. 59

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EU Economic GovernanceAt the end of the day, the Chancellor won approval on theamendment, but only for legally safeguarding the permanent‘crisis mechanism’, that is, the continuation of the EFSF.32Originally, Germany had insisted that the EFSF close downin 2013.33 What she had given away was more or lesseverything the German government had struggled for earlier.Automatic sanctions were no longer envisaged, and nobodyseemed to remember that Germany had asked monthsearlier for sanctions such as banishing high-deficit countriesfrom the eurozone. In other words, the only thing Merkel hadachieved was getting approval for legally fixing aninstrument which she had resolutely dismissed not too longbefore. The agreement was thus heavily criticised by theGerman public.34But are the Council compromise and the task force reportnot still based, to some degree, on German ideas? Theanswer depends on the perspective. When taking the statusquo as a starting point, one has to admit that the reformsenvisioned for the pact will strengthen it somewhat—if theyare adopted and applied. When compared with theCommission proposals, however, the Council decisions onfiscal supervision are much ‘less German’ than they couldbe. The proposals on a ‘competitiveness procedure’ aredefinitively inspired by French constructivism. As to thecrisis mechanism, it is hard to judge since the heads of stateand government refrained from defining the functioning ofthe mechanism. The argument can still be made that thethreats of moral hazard and a continuing transfer unionpersist.At the end of the Council meeting, it became clear thatMerkel’s strategy had never been primarily aimed ateconomic objectives. Her paramount goal was the60

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EU Economic Governanceamendment of the Treaty, for one clear purpose: to makesure that the German Constitutional Court would notinterfere in future cases of financial assistance to otherMember States. It seems that she succeeded in this respect.But it is not clear that this success contributes to thestability of the euro.Merkel’s Wirtschaftsregierung:an institutional redefinitionWhen assessing the German position on economicgovernance, one should also take into account that Merkeltried to redefine the term Wirtschaftsregierung during thecrisis. She thus created a new (institutional) meaning of theterm. The Chancellor had originally rejected the Frenchnotion of gouvernement économique. In the crisis, however,she increasingly recognised the French argument that itshould be up to the Member States to take the crucialdecisions on crisis management. Unlike Sarkozy, though,she did not intend to thwart the ECB. Rather, she wasworried about attempts of the European Commission to gainfurther political influence by suggesting additional‘European’ measures to deal with the crisis.35 Both theCommission’s proposals and several calls of ailing MemberStates for a European solution to the crisis seemed tosuggest that wealthy Member States such as Germanywould have to pay the bill. Merkel thus intended to getinvolved in any measure of crisis management as directly aspossible.She used a kind of semantic ploy when claiming the need ofa Wirtschaftsregierung for the EU.36 She only specified who,in her view, should constitute such a Wirtschaftsregierung: 61

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EU Economic Governancethe heads of state and governments of the 27 MemberStates. The Chancellor did not indicate, however, whatexactly the Wirtschaftsregierung should do. Admittedly, thisinstitutional definition allowed for both repelling theambitions of the Commission and avoiding a gouvernementéconomique in the French sense. By involving all 27Member States, Merkel hoped to lessen political pressureon the ECB.In the course of the crisis, she stuck more and more to thisinstitutional understanding of Wirtschaftsregierung. At theend of the European Council in October 2010 she declaredin Brussels that ‘as of now, the Council works as aWirtschaftsregierung’.37 This statement was not aimed atthe ECB; rather it implied that Member States are the keyplayers when it comes to reforming the institutionalframework of the euro area. It thus was addressed to theCommission and the European Parliament. They should, inMerkel’s view, refrain from calling for too manycompetencies and acknowledge the leading role of theMember States. A few days after the European Council met,she added to this argument by requiring a ‘better interplayof the European institutions’ and a new ‘Union method’ toreplace the conventional Community method. She left nodoubt that the European Council should have the leadingrole among the institutions.38Merkel’s institutional argument was no accident. The reformof economic governance in the eurozone is not only amatter of substance, but also of competencies. Right fromthe beginning of the debate in spring 2010, the MemberStates and the Commission competed for leadership in thisdiscussion. When the Van Rompuy task force met for thefirst time in May, the Commission had already launched its62